Goldman's Themistoklis Fiotakis has released the firm's latest EURUSD outlook.

And while the most amusing part of the note has nothing to do with FX but with the firm's
ongoing attempt to bankrupt clients by holding Greek bonds ("Stay long 30-yr Greek GGBs,
opened at 54c (ask) on 03 September 2010, for a target of 65c and a stop on a close below
50c, now at 53.6c (bid).") we will cut to the chase: Goldman is still calling for 1.50 on the
EURUSD, driven by dollar weakness and increasing European interest rates (which will
surely succeed in bringing the EUR to infinity, and then promptly lead to the destruction of
the currency when half the European continent files for bankruptcy). But that is irrelevant:
what is important is that due to some regression model thingy, the EUR has room to run, or
in Goldmanese: "Given that this simple model has an R-squared of 74%, a significantly high
reading for a regression in changes, it is safe to argue that our factor analysis captures the
largest part of the EUR variation."

1. Overview

Despite the S&P closing flat after a mostly negative session yesterday, Asian equities
traded mostly on a negative tone overnight, while European equities are trading
more mixed this morning. The EUR continues to hover at levels slightly below 1.45,
while US 5yr treasuries are trading around 2.19, a few basis points lower than
yesterday.

On the data side, Chinese GDP came in very close to our forecasts at 9.7% yoy.
Broader activity data appear to indicate that domestic activity has recently gained
some momentum as money and credit growth have also loosened in recent months.
At the same time, CPI accelerated at 5.4%yoy from 4.9% in February. The CNY
continues to appreciate at a faster pace, benefiting our trade recommendations.
India CPI came in at 9% yoy, beating consensus expectations of 8.4% and leading to
a sell-off in local fixed income.

Overnight, in our publications, we reiterated our near-term cautiousness on

commodities and, along similar lines, we discussed our asset allocation views in the
latest GOAL publication. In our latest European Weekly Analyst, we examined the
strength of the European recovery: although the ECB looks set to continue raising
rates this year by 50bps, we expect the sizeable output gap combined with declining
headline pressures to slow the pace of tightening in 2012. We see the ECB‟s refi rate
reaching 2.5% by end-2012.
In terms of data today, keep an eye on the composition of capital inflows into the US
via the TIC data release. The empire manufacturing survey will also be interesting to
watch. The University of Michigan consumer confidence survey, however, will be the
key release of the day; it will be interesting to see if higher oil prices have further
pushed down consumer confidence and boosted inflation expectations.
2. The EUR Rally; Primarily a Reflection of Dollar Weakness…

Since its trough on January 7th at 1.29, the EUR/$ has appreciated by 11.4%. This
rally has been in line with our broad views on the USD and the EUR. In addition we
have recommended two long EUR/$ trades throughout the course of the rally, both
profitable. The most recent EUR/$ trading recommendation is still live and we are
currently trading 3.6% short of our target level of 1.50.

Understanding the key drivers of the EUR move will help us assess the tactical risks
around it as well. For that reason we use our “FX Betas” framework to break down
the recent EUR strength to the macro factors that have driven it. FX Betas are simple
linear regressions of weekly changes in exchange rates (against the USD) against
weekly changes in domestic front end rates (2y rates), US 2yr rates, dollar direction
(using the broad USD TWI), positioning (using short term risk reversals as a risk
proxy) , and risk sentiment (as captured by the VIX). Cross asset relationships with
currencies are typically unstable; over time, sensitivities of currencies to other assets
tend to change. So our framework is trying to capture the most recent market
sensitivities. For that reason, these regressions are run over a rolling sample of 12
months to reflect current market sensitivities. Every month we present the updated
coefficients in our FX monthly publication.

According to this simple analysis, the EUR appreciation year-to-date has been, by
and large, a dollar move. Out of the 15 big figures that the EUR has risen by since
the January 7th lows, 9 can be attributed to the shift in the USD TWI. This confirms
our focus on the dollar direction as the key macro theme in FX space and the notion
that the EUR tends to trade as the “anti-dollar” more often than not, mirroring to a
large extent moves in the USD TWI.

As discussed in the most recent FX monthly publication, structurally we remain dollar

bearish (and EUR bullish as a consequence) as long as the three key macro pillars of
our view remain in place; i.e. as long as the FED maintains its accommodative policy
stance relative to the rest of the world, the US trade deficit remains wide and the
financing of the external deficit remains insufficient.

That said, in the near term, the risk is that softer price action in risky assets may
trigger dollar strength. The prevailing correlations continue to indicate that the dollar
tends to underperform at times of strong price action in risky assets. And as Noah
Weisberger and Kamakshya Trivedi have pointed out, over the last few trading
sessions, the cyclical sectors of the US equity markets have underperformed,
indicating possible concerns over near-term growth trends within the equity market.
3. …But Also Driven by Higher EUR Interest Rate Expectations.

The second most important driver of the EUR/$ since its January lows has been the
re-pricing of front end European interest rates. The shift in 2yr EUR swap rates
accounts for about 6 big figures of the 15bps EUR rally. Together with dollar direction
they account for the EUR move in full!

Of the 86bps move in 2yr EUR rates, 25bp reflects an actual ECB hike and the rest
reflects a shift in policy rate expectations towards earlier hikes in the remainder of
the year. Our view remains that the ECB will hike two more times this year,
confirming the shift in expectations. However, as Francesco Garzarelli and Mike
Vaknin have recently argued, the market is now pricing in our views to a very
significant extent. In fact, we continue to recommend receiving EUR rates (vs CHF
rates) as we see less space for European rates to go significantly higher from here.

In our framework, this means that EUR/$ will likely receive less support from
European rates going forward. And if European rates were to decline, such a shift
could prove to be a source of vulnerability for the EUR/$. Watching Global and
European data and monitoring the market‟s growth expectations and inflation data
will be key along those lines.

4. Speculative Positioning Has Probably Been Less Important of A EUR/$

Driver.

Interestingly, the other variables in our model are insignificant both in terms of
statistical inference and in terms of actual contribution to the EUR/$ move. By itself,
this is an interesting fact.

* First, it implies that speculative positioning has not been a key driver of the
EUR/$ move since January, at least as far as risk reversals can capture such
positioning as a proxy.
* Second, the impact of US rate shifts has been very small. This helps explain how
both our long EUR/$ recommendation and our short US 5y rate recommendations
appear to be working at the same time.
* Third, the impact of risk sentiment on the EUR appears to be small. However, a
significant chunk of this is captured by shifts in dollar direction as we argued earlier.
5. Still Room For the EUR/$ to Reflect A Declining Fiscal Risk Premium.

Given that this simple model has an R-squared of 74%, a significantly high reading
for a regression in changes, it is safe to argue that our factor analysis captures the
largest part of the EUR variation.

Intuitively, however, one factor not fully captured in our model is the decline in the
fiscal risk premium on the EUR. In our commentary, we have highlighted this as one
of the key catalysts for EUR strength. In early January, the EUR/$ exchange rate
incorporated a significant premium associated with the European fiscal crisis. Given
that spreads for Spain and Italy, the more systemically important countries in the
Eurozone periphery, have contracted since, one would have expected the EUR to
receive an extra boost from this. Interestingly, our analysis does not point to a
strong outperformance of the EUR relative to the factors included over that time
frame. It is possible that the increase in front-end interest rates is capturing this
decline in systemic risk, with the decline in fiscal risks allowing the ECB to turn more
hawkish. That said, in the near term, it may also be the case that the EUR has space
to rise further as the associated risk premium declines.
6. Current Trading Views

The following trading ideas from the Global Markets Group reflect shorter-term views, which
may differ from the longer-term „structural‟ positions included in our „Top Trades‟ list further
below.

In FX:

1. Stay short $/CNY via 1-yr NDFs, opened at 6.7550 on 10 June 2010, and a trailing stop
of 6.70 for the $/CNY spot rate, now at 6.5000.

2. Stay long EUR/TRY, opened at 2.1620 on 9 February 2011, with a target of 2.35 and a
stop on a close below 2.09, now at 2.2011.

3. Stay long RUB against a basket of EUR (45%) and USD (55%), opened at 33.68 on 1
March 2011, with a target of 31.31 and a stop on a close above 34.71, now at 33.8991.

4. Stay long EUR/$, opened at 1.4085 on 18 March 2011, with a target of 1.50 and a stop
on a close below 1.35, now at 1.4474.

5. Stay short $/MYR, opened at 3.066 on 31 March 2011, with a target of 2.90 and a stop
on a close above 3.08, now at 3.0595.

6. Stay short $/PHP via 1-yr NDFs, opened at 43.11 on April 7 2011, with a target of 41.50
and a stop on a close above 44.50, now at 43.316.

On Rates:

1. Stay long 30-yr Greek GGBs, opened at 54c (ask) on 03 September 2010, for a
target of 65c and a stop on a close below 50c, now at 53.6c (bid).

2. Stay long 10-yr Spanish Bonos vs. Italian BTPs, opened at 54bp on 25 February 2011, for
a target of 0bp and a stop on a close above 80bp, now at 61.7bp.

3. Pay 5-yr Swiss swap rates vs Euroland, opened at -137bp on 4 March 2011, for a target
of -100bp and a stop on a close below -152bp, now at -139.9bp.

4. Stay short 5-yr US Treasuries, opened at 1.936% on 18 March 2011, for a target of
2.50% and a stop on a close below 2.0%, now at 2.20%.

5. Pay 5-yr Korean swaps, opened at 4.04% on 21 March 2011, for a target of 4.40% and a
stop on a close below 3.80%, now at 4.10%.